Market Makers Gunning for Retail Investors

NEW YORK (TheStreet) -- Urged by Wall Street insiders, the SEC is considering a rule change that will increase market maker profits at the expense of retail investors. Citigroup (C), J.P. Morgan (JPM), Goldman Sachs (GS), Merrill Lynch (MER), Morgan Stanley (MS) and others stand to profit. Citigroup has submitted a letter to the SEC supporting a pilot program.

To fully understand how rule changes could impact the market, it's helpful to understand how markets evolved. In 1982, we saw the first 100-million-share day of trading volume, and I still remember the front page headline announcing the historic event. Ten years later, 200 million shares traded in a single day for the first time.

Oh yes, the "good old days", when investors paid exorbitant commissions and were forced to buy at the offer and sell at the bid with typical spreads of 1/8 (12.5 cents). Between the stockbrokers, market makers and specialists each taking their pound of flesh. A 1,000 share order could cost upwards of $200.

A specialist at the NYSE (ICE) had a de facto license to print money, and investors had to pay to play. A look at the lifestyles of Wall Street specialists and market makers suggest they made out much better than most retail investors.

It was a fantastic gig (for the insiders) while it lasted, but alternative markets and new technology introduced competition for the first time, increasing efficiency and driving costs lower.

Transaction commissions dropping from $40 to $4 saved investors significant amounts of money. The greatest efficiency and savings came when the SEC required a level playing field allowing everyone (including retail investors) to display a bid or ask that anyone else could transact with.

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